Do Compaq's woes reflect the PC market?

The recent resignations of Compaq CEO Eckhard Pfeiffer and Earl Mason, the company's CFO, follow a series of dismal financial quarters for Compaq, which has been struggling with a rat's nest of problems ranging form huge inventory issues, razor-thin profit margins on computer sales, and disgruntled Compaq resellers.

"Call it a converging of events ... at the wrong time," says Terry Shannon, Compaq analyst and author of the newsletter Shannon Knows Compaq. Analysts say the writing was on the wall for the number-one PC seller to take aggressive action to prevent further erosion of its market leadership.

"Compaq is trying to wear too many different hats," says Shelley Olhava, analyst with IDC. "It's trying to be everything to everybody and it can't."

Pfeiffer has said phooey all along to pundits' appraisals. He insists that Compaq, like much of the PC industry, is a victim of industry-wide pricing problems and low demand for new PCs. But some analysts are quick to contradict Pfeiffer, suggesting Compaq largely only has itself to blame.

The PC industry is healthy, growing, and profitable, says Toni Deboise, of PC Data. Apple Computer, Hewlett-Packard, Gateway and Dell are reporting strong unit sales.

PC sales to consumers are up 9.4 per cent compared to last year, according to IDC. Compaq sales are only up 6.2 per cent.

Deboise concedes Pfeiffer is correct that a new breed of low-cost computer makers is making it difficult for Compaq to maintain its market share. In the US, sub-$US500 PC makers like eMachines and upstarts like Microworkz, which bundle PCs into Internet service packages, have and are taking their toll on Compaq. But analysts suggest Compaq still lags strategically and tactically.

Strategically, Compaq must rectify revenue with profits, and lower its costs of selling computers. These goals have prompted Compaq to move some sales to the Internet, and to adopt a Dell-like build-to-order manufacturing model. Tactically, Compaq has largely failed to adopt a direct sales model, Shannon says. For example, Compaq recently said its five-month-old Prosignia PC line, designed for direct sales, will be available in US retail stores.

Compaq and other PC makers walk a fine line appeasing resellers who sell many PCs for them and selling directly to buyers. "There are clearly signs of discontent among resellers," Shannon says. "If you sell Compaq PCs and you see sales being sucked off by a Web site, of course you're going to be a bit miffed." The trick is keeping the resellers happy.

Compaq also faces problems in the PC business market. Dell passed Compaq last quarter as the leading PC supplier to US businesses, according to ZD Market Intelligence. Dell now holds a 21.2 per cent share of PCs sold to US businesses, compared to Compaq's 18 per cent.

Research firm InfoBeads says Compaq is also hurt by dwindling cost of computer servers, which have historically have accounted for a disproportionate amount of Compaq profits.

The average selling prices of notebooks and desktops have declined between 10 to 16 per cent over the last year, according to InfoBeads. Conversely, servers declined 31 per cent in the same time frame.

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Tom Spring

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